Over the last 50 years housing has performed well when compared to inflation. The value of all houses in the UK totals 4 trillion pounds, representing half the entire wealth of the household sector, and double the value of our pensions.
Houses as mentioned earlier have performed very well during our lifetimes and for most people their house is the largest asset they have, and many people are now looking to property investment to supplement their retirement income. Most people enter the buy to let market with the aim of ticking along and renting a property out for some years, and then selling the property at retirement and making a capital gain that can be used as a pension. The logic for these actions are based around our own experiences that are actually just a recent snapshot of the housing market.
Unfortunately, unlike deposits, shares and gilts there has been very little long term information regarding house price movements. We have a tendency to rely on our own personal experiences or indexes provided by lenders that only go back to the 1950’s. However, Yale University have constructed a house price index based on US prices that goes back to 1890. They have adjusted the increase of house prices after taking off inflation and come to the conclusion that house prices have increased by 0.2 percent per year over the last 120 years. Studies in Australia have shown that they have done a little better with 0.9 percent growth each year over 150 years to 1995. In Europe during the 1970’s an even longer study was done, with regard to Amsterdam, going back 350 years to again reveal US experiences of 0.2 percent growth per annum.
In all the housing markets mentioned there have been considerable levels of volatility, with tulip mania in Holland, through to gold rushes and much development in Australia and America. Our recent experiences have shown that the average price in the UK has increased in value from £1,900 in 1952 to £167,000 today. This at first appears to be a fabulous increase until we realise that earnings have increased 60 fold since those days.
I think that the above statistics indicate that if you are buying property for investment that timing is crucial to be successful. If you set out to make a capital gain on houses, it makes little sense to join the party when it is in full swing. It is better to bide your time and consider investment when people have little appetite for parties. It is then worth referring to some statistics that give us some clues to the future direction of the housing market. For example, I believe that the housing market has generally returned to 2007 price levels. As a result of this I think that people are borrowing, using lower income multiplies that have combined with lower interest rates to make housing more affordable. Admittedly the market is affected adversely with much tighter lending criteria and bigger deposits. But, I believe that even though the market in the short term may have further to fall, once the economy improves, buying now will represent in the long term reasonable value. Having said that nothing is guaranteed and I’d stress that buying for the longer term for people who wish to dispose of their portfolio on retirement is reasonable in my opinion. However, I would not recommend that people close to retirement invest for capital gains at this point due to the short term uncertainties. As mentioned earlier the long term statistics should help people to time their entry into the market and give them a better chance to be successful in this area. Unfortunately, as always risk is involved in investment and there are no sure bets. It is always worth consulting an IFA who specialises in mortgages to help you to see if investing in this area is right for you at this time.
Kieron Bassett Financial Services specialises in mortgages and has two Independent Financial Advisers. Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or visit www.kieronbassett.com.
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